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Directed lending has created recovery problems to the Commercial Banks in India. Leading to high level of NPAs that has resulted in negative impact on their profitability due to the necessity of provisions, recoveries and write offs as per RBI guidelines. Rising NPAs have direct impact on the bottom line as legally banks cannot book income on such accounts.
Directed lending has created recovery problems to the Commercial Banks in India. Leading to high level of NPAs that has resulted in negative impact on their profitability due to the necessity of provisions, recoveries and write offs as per RBI guidelines. Rising NPAs have direct impact on the bottom line as legally banks cannot book income on such accounts.
Directed lending has created recovery problems to the Commercial Banks in India. Leading to high level of NPAs that has resulted in negative impact on their profitability due to the necessity of provisions, recoveries and write offs as per RBI guidelines. Rising NPAs have direct impact on the bottom line as legally banks cannot book income on such accounts.
Department of Commerce, Mangalore University, Mangalagangotri-574199 paramasiddhantha@gmail.com
Abstract
Directed lending has created recovery problems to the commercial banks in India. Leading to high level of NPAs that has resulted in negative impact on their profitability due to the necessity of provisions, recoveries and write offs as per RBI guidelines. NPAs also negatively impact the capital adequacy ratio, net worth and credibility of banks. Rising NPAs have direct impact on the bottom line as legally banks cannot book income on such accounts. Indian banks have to play more proactive role in minimising the level of NPAs. Foreign banks and private banks are more effective in recovering the due amount from the defaulters compared to Public sector banks. Write off of NPAs may not be a solution for the problem. The success of lending and recovery is possible only through the proper attention and concerted efforts by all stakeholders like regulators, policy makers, banks and bank customers. Key words: Commercial Banks, NPAs, write-offs, slippage and Recovery.
Paper to be published under: Commerce
Introduction:
Target oriented approach in Indian banks has eroded the quality of lending, leading to high level of NPAs that has resulted in negative impact on their profitability due to the necessity of provisions, recoveries and write offs as per RBI guidelines. NPAs also negatively impact the capital adequacy ratio, net worth and credibility of banks. Rising NPAs have direct impact on the bottom line as legally banks cannot book income on such accounts. Indian banks need to be more proactive in all their operations, particularly risk identification and management, to operate profitably in the prevailing milieu (Talwar 2013) 1 . The problem of NPAs can be achieved only with proper credit assessment and risk management mechanism. In a situation of liquidity overhang, the enthusiasm of the banking system to increase lending may compromise on asset quality, raising concern about their adverse selection and potential danger of addition to the stock of NPAs. It is necessary that the banking system is to be equipped with prudential norms to minimize if not completely to avoid the problem of NPAs. The onus for containing the factors leading to NPAs rests with banks themselves. This will necessitates organizational restructuring, improvement in the managerial efficiency and skill up gradation for proper assessment of credit worthiness. It is better to avoid NPAs at the nascent stage of credit consideration by putting in place of rigorous and appropriate credit appraisal mechanisms (Prasad and Veena 2011) 2 .
In India the tax law allows 100% tax deductibility for the calculation of taxable income for banks in the case of loans written off. However, provisions for sub- standard assets are permitted as deduction only to the extent of 7.5% of the banks total income. Because of this special tax law, Indian banks prefer to write-off the doubtful and bad assets rather than make provisions. This is shown in the reduction of gross NPLs instead of an increase in loan loss reserves (Islam et al) 3 .
When the banker thinks that it is un-remunerative either to file suit and/or continuing the loan account in banks books, then bank may go for waivement of legal action and/or writing of dues. In case of waiver of legal action banks take a decision not to pursue recovery through a court of law and through write off the banks decide to close the account by transfer of funds from their profits to the loan account. Circumstances under which legal actions are waived and dues are written off:
Waivement of Legal Action:
Means available with borrower and guarantors are insufficient. Borrowers are beneficiaries under Government sponsored schemes and the economic conditions of the beneficiaries are still persisting in subsistence level. Recovery cost is quite high and prohibitive as recovery expected is not going to equalize even the cost. Borrowers are absconding and/or untraceable. Obtaining periodic balance confirmation letters-cum-acknowledgement have become a cumbersome process and not remunerative to bank. Securities are already disposed of by the borrower either in part or whole and no assets are available to banks for recovery of dues.
Writing off dues:
In addition to the factors which favour Waivement of legal action, if situation is such, that it has become quite un remunerative to continue the account in banks book, due to one reason or the other, then Bank goes for writing off dues. Under following situations the bank may proceed with write off dues: When cost involved in servicing the loan has become high and prohibitive. When borrowers are adjudicated as insolvents and bank has already realised part of its dues as a secured creditor. When revenue authorities under State Public Recovery Act have already affected maximum recovery through sale proceeds of banks security and/or properties of borrowers and chance of further recovery is quite bleak. When proceeding has turned out to be a futile exercise as borrower and guarantors are untraceable. When decrees remain unexecuted for years together (Toor1994) 4 .
Table 1 Trends in slippages and recovery (Rs Bn) Source: RBI (2013) Fresh accretion to NPAs during the year, provide a better metric to assess the credit management system in banks. While the slippages reduced during early 2000s, they started rising significantly since 2006-07. Growth rate of slippages which was negative till 2005-06, turned sharply positive in 2006-07 reaching a peak of 51.6 per cent in 2011-12. The net slippages (slippages net of recovery during the year) also showed the same trend. Contrary to the popular notion that the rising NPAs are fallout of the global financial crisis, the data suggests that the credit administration in the banks had started weakening and the asset quality had started deteriorating even before the onset of the crisis. Further, slippages exceeded reduction in NPAs, especially post crisis, as the ratio of reduction in NPAs to slippages fell dramatically from about 105.3 per cent in 2001-07 to 70.8 per cent in 2007-13. Simultaneously with increased slippages, recovery efforts of the banks suffered compounding the asset quality concerns as evidenced by the increasing trend in the ratio of slippages to recovery and up gradation since 2006-07 and the relative large share of write offs in total reduction in NPAs of banks. The ratio of slippages to recovery and up gradation represents the extent to which banks have been able to reduce their NPAs through recovery efforts. The ratio for the banking sector as a whole deteriorated from a low of 125.4 per cent in 2005-06 to 264.1 per cent during 2009-10 and remained elevated at 257.0 per cent in 2012-13. Recovery performance also varied widely across banks.
Particulars 2001-2013 2001-2007 2008-2013 NPAs at Beginning of the period 604 604 505 New Accretion to NPAs during the period 6248 1591 4657 Reduction in NPAs during the period 4920 1690 3230 Due to up gradation 1109 240 869 Due to write-off 2036 739 1297 Due to actual recovery 1775 711 1064 NPAs at End of the period 1932 505 1932
Table 2 Recovery from Written-Off Accounts during the fiscal year ended (` Rs Mn) Mar- 01 Mar- 02 Mar- 03 Mar- 04 Mar- 05 Mar- 06 Mar- 07 Mar- 08 Mar- 09 Mar- 10 Mar- 11 Mar- 12 Mar- 13 All Banks 4,240 5,010 4,790 10,650 17,680 29,020 24,800 31,010 36,860 43,620 50,360 51,910 69,600 PSBs 4,180 4,940 4,630 10,080 16,120 26,990 22,200 28,240 33,720 38,190 44,120 46,560 59,53 OPBs 20 30 50 260 450 840 1,320 1,730 2,170 2,070 2,310 2,010 2,000 NPBs 30 20 40 300 1,110 1,090 1,200 870 920 1,970 3,270 2,940 7,790 FBs 0 10 60 0 0 100 80 160 40 1,390 660 400 290 Source: RBI (2013) Table 3 Written-Off Accounts during the fiscal year ended (` Rs Mn) Source: RBI (2013) Mar- 01 Mar- 02 Mar- 03 Mar- 04 Mar- 05 Mar- 06 Mar- 07 Mar- 08 Mar- 09 Mar- 10 Mar- 11 Mar- 12 Mar- 13 All Banks 64,460 87,110 120,2 10 135,59 0 108,23 0 116,57 0 116,21 0 116,53 0 159,96 0 250,19 0 238,96 0 208,92 0 322,18 0 PSBs 55,550 64,280 94,48 0 113,08 0 80,480 87,990 91,890 80,190 69,660 111,85 0 177,94 0 155,51 0 270,13 0 OPBs 3,310 5,880 6,530 5,250 4,640 5,440 6,100 7,240 6,160 8,840 6,820 6,710 8,630 NPBs 5,800 8,960 15,64 0 12,860 16,820 14,090 12,320 15,770 50,630 67,120 23,360 30,240 34,870 FBs 200 7,980 3,560 4,400 6,280 9,050 5,900 13,340 33,500 62,380 30,830 16,460 8,550 There is evidence of increased use of write offs by banks to reduce NPAs, which is a pointer to weaknesses in credit management. Write offs were initially introduced as a tool for banks to manage their tax liabilities on impaired assets. However, they subsequently emerged as a tool for banks to manage their reported gross NPA numbers. Write offs, in fact, contributed significantly to the reduction in the quantum of gross NPAs as compared to actual recoveries and up gradations. Write offs as a percentage of terminal reduction has consistently been above 50 per cent mark.
These practices clearly engender moral hazard issues as they reduce the banks drive to improve recovery efforts. They also result in leakages in the recovery process. This is evidenced by the fact that, on an average, less than 10 per cent of the total amount written off (including the technical write off) is recovered. Further bearing testimony to the poor recovery efforts of the banking system are the trends in the ratio of up gradation to slippages. Even in the good times, the ratio was never more than 20 per cent a clear sign of poor standards of credit and recovery administration as well as a certain amount of apathy on the part of banks in expending efforts to revive accounts. The spirit of good credit management is to revive genuine problem accounts and not to retain them as NPAs for an eventual write- off.
The new private sector banks and foreign banks recorded higher slippage ratio immediately after crisis but were able to arrest the increasing trend in slippages through focused attention on credit risk management including exit strategies. In recent years, the ratio has risen sharply for PSBs. This indicates that new private sector banks and foreign banks were able to manage their asset quality better than PSBs as they were quick in identifying NPAs, while PSBs resorted to retrospective restructuring to report lower NPAs initially. This practice eventually tipped the scale against the PSBs and thus, in hindsight, regulatory guidelines also contributed to the decline in the asset quality of the PSBs. The bank group wise trends in slippages are further re-enforced when the trends in slippages and fresh restructuring are examined. The ratio of slippages and fresh restructuring to advances rose sharply for the PSBs post crisis from 5.2 per cent in March 2009 to 7.1 per cent in March 2013. The ratio reduced for foreign banks and new private sector banks and stood at a much more robust 1.8 per cent in March 2013.It is, thus, clear that the weaknesses in credit and recovery administration that existed prior to the crisis, especially in the case of PSBs, were not dealt with in a timely manner. Viewed in conjunction with the trends in restructuring of advances, however, there are evident and growing concerns about the asset quality of banks in India (Chakrabarty 2013) 5 .
Conclusion Indian banks have to play more proactive role in minimising the level of NPAs. Foreign banks and private banks are more effective in recovering the due amount from the defaulters compared to Public sector banks. Write off of NPAs may not be a solution for the problem. The success of lending and recovery is possible only through the proper attention and concerted efforts by all stakeholders like regulators, policy makers, banks and bank customers. References: 1. Shalini Talwar (2013), NPAs in Indian Banks LAP LAMBERT Academic Publishing. 2. Prasad and Veena (2011) NPAs Reduction Strategies for Commercial Banks in IndiaIJMBS, Vol. 1, Issue 3. 3. Islam. M. Shofiqul., S. Chandra and M. Abdul (2005), Non performing loans -its causes, consequences and some learning, MPRA Paper No. 7708. 4. Toor, N.S (1994), Non performing advances in banks concept practice and management, skylark publications, New Delhi, pp 163-177. 5. Chakrabarty K.C (2013), Two Decades of Credit Management in Banks: Looking Back and Moving Ahead RBI monthly Bulletin, December, pp 17-40.